Minister Status Determination
Effective November 2009
The following criteria will be used in determining the tax treatment of compensation to ordained ministers who are members of faculty and/or staff of the University. In order for an employee to receive minister status for tax purposes, the status test and the tasks test, explained below, must be satisfied.
Status Test
The individual must be “ordained, commissioned, or licensed” as a minister by a church. A copy of the certificate of ordination or other relevant documentation will be kept on file by the University.
Tasks Test
Minister status may be appropriate in the following non-church settings:
Denominational service – the individual performs services of “control, conduct and maintenance” for an institution which is an integral agency of a church. Based on the definition of integral agency by the IRS and review of the University’s bylaws by John Butler, Capin Crouse LLP tax partner, Greenville University is not an integral agency of the Free Methodist Church.
Assignment by the church – an employee of a non-church institution may qualify for minister status if he/she has been assigned by his/her church for the purpose of furthering the ministry of that church. The assignment must be clearly and annually documented and must occur prior to employment. The assigning church must have an ongoing involvement with the minister and the ministry to which the minister is assigned.
Other service – Since the University is not a church or an integral agency of a church, and the employee has not been assigned by their church, minister status only applies to individuals whose services for the University substantially involve conducting religious worship or performing other sacerdotal (ministerial/sacred) functions. Examples might include preaching, administering sacraments, conducting Bible studies, spiritual or pastoral counseling, etc. “Substantial involvement” is not defined by the IRS. It is the opinion of John Butler, Capin Crouse LLP tax partner, that “substantial involvement” certainly indicates greater than 50% of an employee’s time should be spent on such duties, and he would further recommend a standard of 80% or more. Occasionally, there may be situations where other faculty or staff responsibilities could be considered sacerdotal functions. Where applicable, job descriptions will be utilized to delineate ministerial functions from other faculty/staff responsibilities.
Tax Treatment of Ministers
Once it is determined that an employee qualifies for minister status with Greenville University, the following compensation and tax treatments will apply:
FICA Exemption
The University will not withhold Social Security/Medicare tax nor pay the employer portion of these taxes. The minister is responsible for calculating and paying these taxes with his/her annual 1040 filing (IRS Schedule SE). However, the University shall subsidize the employee’s payment of these taxes by calculating and including in the employee’s taxable compensation an amount equal to 7.65% of gross wages not including designated housing allowance. At the employee’s request, a voluntary withholding agreement can be put in place whereby the University will withhold an additional amount from compensation to cover the employee’s anticipated liability for the Social Security/Medicare tax. However, this additional withholding will be reported as federal income tax withholding, in accordance with IRS rules.
Housing Allowance
The employee will complete, annually, the Verification of Ministerial Housing Allowance worksheet and submit it to the University. The employee’s request will be presented to the Board and, contingent upon independent third- party review that the employee meets the qualifications of minister tax status, the employee’s requested portion of annual salary shall be designated as housing allowance. The amount of annual salary designated as housing allowance must be determined in advance of it being paid. Any amounts paid which are later requested as housing allowance are not excludable from taxable income. Properly designated housing allowance will be excluded from the amount of compensation subject to income tax withholding and thus, will not be included in taxable income reported on Form W-2. However, with the minister’s 1040 filing, the minister is responsible for adding back any amount that is not excludable based on IRS limits. The IRS limits the excludable amount of housing allowance to the smaller of actual housing expenses or the fair rental value of the minister’s home including utilities and furnishings.
Risks to the University of Misclassification
The University could be held liable by the IRS for failure to withhold required employment taxes. In the case of minister status and related housing allowance, this would include FICA/Medicare taxes (employer AND employee portions) and federal and state income taxes required to be withheld related to the housing allowance. In addition, there would likely be penalties and interest charged. Increasing this potential liability is the number of employees given ministerial status and the fact that if the IRS disagrees with the classification(s), they will likely examine the previous three years for the same issue.